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Federal Reserve Districts

Second District--New York

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Full report

Economic activity in the Second District has continued to expand at a steady pace since the last report, but with a fair degree of variation across sectors. Price pressures persist, particularly in manufacturing, but consumer prices remain generally stable. Manufacturers report some acceleration in activity in early November. Hiring activity has shown signs of picking up, for both factory and office workers. Conditions in the financial sector are reported to have strengthened, and bonuses are expected to be up substantially this year. Retailers continue to report lackluster sales, but tourism remains strong. Both commercial and residential real estate have shown signs of cooling, though New York City has shown more resilience than the rest of the region. Finally, bankers report widespread declines in demand for consumer loans and residential mortgages and note a moderate increase in consumer delinquencies.

Consumer Spending
Retailers report that general merchandise sales were close to plan in October but somewhat below plan in early November. Overall, same-store sales are reported to be up only modestly from comparable 2004 levels. One contact attributed the sluggish sales to high energy prices severely affecting consumers' liquidity. Despite the lackluster sales, retail inventories were said to be at satisfactory levels going into the holiday season. Selling prices for comparable merchandise are reported to be down slightly from a year ago, though changes in the mix--toward more upscale product lines--have boosted revenues. Consumer confidence in the region recovered somewhat in October following a drop in September: the Conference Board's survey of Middle Atlantic residents showed a noticeable bounce in confidence, while Siena College's survey of New York State residents showed only a slight up-tick.

Tourism has remained strong since the last report. Manhattan hotels report that business remained brisk in October, though perhaps a bit less robust than during the third quarter. Occupancy rates remained exceptionally high--near 90 percent--in October, though they slipped below year-earlier levels. Room rates hit record highs, 17 percent above a year earlier. Broadway theaters report further strengthening in business in late October and early November, with attendance up more than 15 percent from a year earlier and revenues up more than 20 percent. Also, passenger traffic at Buffalo Niagara International Airport is reported to have surged to record levels thus far in 2005, up an estimated 13 percent from 2004 levels.

Construction and Real Estate
The region's housing market has continued to soften in recent weeks, though New York City's sales and rental markets remain fairly strong. New Jersey homebuilders report that, while prices still remain well ahead of a year ago, concessions are being offered for the first time in years. Overall sales activity for new and existing homes in New Jersey has slowed, and at the current sales pace, the inventory of unsold homes has risen from roughly three months to five months over the past year. On the supply side, builders indicate a shortage of drywall and gypsum products, and a considerable increase in lumber prices. Manhattan's co-op and condo market generally remained strong in October and early November, though there were scattered signs of softening. One major real estate firm notes that, while the inventory of unsold apartments has risen, October sales transactions were up 5 percent from a year earlier, and average selling prices were still up almost 15 percent. Another contact indicates that the market for 2- and 3-bedroom apartments has slackened noticeably, whereas smaller, entry-level units have seen significant price appreciation and a shortage of inventory.

Commercial real estate markets across the New York City metropolitan area were mixed in October: Lower and Midtown Manhattan's office markets continued to strengthen, while most of the suburban markets slackened moderately. Office vacancy rates climbed in Westchester and southwestern Connecticut, edged up in Long Island, and were little changed in northern New Jersey. Asking rents were flat across most of the region, but were up 3 to 4 percent in Midtown Manhattan and Long Island. Non-residential construction contracts in western New York State are reported to be running below comparable 2004 levels, but residential development has been brisk--construction has recently begun on a number of apartment projects in the Buffalo area, as well as a large hotel and casino 50 miles south of the city.

Other Business Activity
Conditions in the security industry have strengthened further in October and November, led by a notable and broad-based increase in transactions. Firms are reported to be expanding staff, and the upcoming bonus season is expected to be strong, with 12 to 15 percent gains over last year's levels. More generally, the labor market has shown further signs of strengthening. A major New York City employment agency reports that the market for office workers has continued to improve; there has been less of a seasonal slowdown than usual in November, and there is an increasing shortage of qualified workers. While the financial sector continues to account for a large share of their business, the strength in recent months has been broad-based. Manufacturing contacts in the region also report some pickup in hiring activity in early November.

More broadly, manufacturing activity has shown signs of strengthening. While purchasing managers in the New York City and Buffalo areas report that activity was relatively flat in October, our latest survey of New York State manufacturers, conducted in early November, points to a broad improvement in business conditions and increased optimism about the six-month outlook. Manufacturers also note further increases in input price pressures and an increasing ability to hike selling prices.

Financial Developments
Small to medium-sized Second District banks report widespread decreases in demand for loans across all categories. In particular, 42 percent of bankers reported lower demand for consumer loans and none reported higher demand--the most negative readings on this question in more than a decade. Similarly, 55 percent of bankers report lower demand for residential mortgages, led by refinancing.

Credit standards for all loan types remained unchanged except commercial mortgages, for which bankers reported tighter standards on balance. Higher loan rates were reported for all loan categories since the last report. Finally, delinquency rates remained unchanged across all loan categories except consumer loans, where bankers report some net increase in delinquencies.

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Last update: November 30, 2005